Local government responsiveness to federal transfers: theory and evidence
Abstract
Federal transfers can depend on local fiscal capacity which is measured by local tax bases. The aim of this paper is to understand to what extent and how these transfers affect local tax decisions. We develop a model with two provinces producing one mobile good. The good is taxed according to the destination principle. Final consumers decide to buy the good from the province where it is cheaper. The two provinces engage in tax competition. The introduction of scale economies into the shopping technology generates nonlinear tax reaction functions which make it possible to test the effect of a transfer equalizing local tax bases on tax competition in two complementary tax regimes. Used for this purpose are cigarette and gasoline tax data from Canada. In the case of cigarette tax it is found that nonlinearity in tax competition is almost entirely offset when equalization holds: tax competition in the two tax regimes become closer. The shopping technology for gasoline gives less scope for scale economies, so that equalization does not affect reaction functions.Download Info
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5373.Length:
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:pra:mprapa:5373
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Keywords: fiscal competition; equalization; transfer; externality; tax-rate;Other versions of this item:
- Leonzio Rizzo, 2008. "Local government responsiveness to federal transfers: theory and evidence," International Tax and Public Finance, Springer, vol. 15(3), pages 316-337, June.
- H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
- H7 - Public Economics - - State and Local Government; Intergovernmental Relations
- H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Karkalakos, Sotiris & Makris, Miltiadis, 2008. "Capital Tax Competition in the European Union: Theory and Evidence from Two Natural Experiments," MPRA Paper 21437, University Library of Munich, Germany, revised 2010.
- Christos Kotsogiannis, 2010.
"Federal tax competition and the efficiency consequences for local taxation of revenue equalization,"
International Tax and Public Finance,
Springer, vol. 17(1), pages 1-14, February.
- Christos Kotsogiannis, 2007. "Federal Tax Competition and the Efficiency Consequences for Local Taxation of Revenue Equalization," Discussion Papers 0701, Exeter University, Department of Economics.
- Leonzio Rizzo, 2006. "Le inefficienze della competizione fiscale: una rassegna dei principali modelli teorici," Economia Politica, Le edizioni del Mulino, vol. 0(1), pages 89-120, April.
- Alejandro Esteller-Moré & Leonzio Rizzo, 2009.
"(Uncontrolled) Aggregate shocks or vertical tax interdependence? Evidence from gasoline and cigarettes,"
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2009/24, Institut d'Economia de Barcelona (IEB).
- Alejandro Esteller-More (Universitat de Barcelona) & Leonzio Rizzo (Universita di Ferrara), 2009. "(Uncontrolled) Aggregate shocks or vertical tax interdependence? Evidende from gasoline and cigarettes," Working Papers in Economics 233, Universitat de Barcelona. Espai de Recerca en Economia.
- Esteller-Moré, Alejandro & Galmarini, Umberto & Rizzo, Leonzio, 2012. "Vertical tax competition and consumption externalities in a federation with lobbying," Journal of Public Economics, Elsevier, vol. 96(3), pages 295-305.
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